The lost legacy of with-profits: Millions left frustrated by 'outdated concept' in savings

Fed up: Keith Miller, with wife Jackie, has ditched most of his with-profits plans

Millions of savers who have invested in with-profits pensions,
endowments and bonds should look again at whether their money is really
working for them after results from major insurers showed that most
customers are suffering.

Keith Miller, 61, is one of many
who have had enough of with-profits. Over the years, he has bought
with-profits endowments, bonds and pensions - and been disappointed by
them all.

'I'm totally fed up with these investments,' he
says. 'My plans seem to be stagnating. I had an endowment with
Prudential that came nowhere near paying off the mortgage it was
designed to clear. When I compare these products with the growth on
other investments linked directly to stock markets, the with-profits
plans are lagging well behind.'

Keith, who lives in Accrington, Lancashire, with his wife, Jackie,
59, a bookkeeper, owns a commercial photography studio in Blackburn. He
has already cashed in some of his with-profits investments, switching
to other products with lower charges and better growth prospects.

Now all he has left are two with-profits pensions bought many years
ago through Allied Dunbar (now Zurich) and Windsor Life. He is due to
meet his financial adviser Adrian Shandley later this month to arrange
a switch from these investments.

Keith says: 'At my age, I have to start serious planning for
retirement and I need to have my savings working hard, not stagnating.'

Shandley, who runs Premier Wealth Management in Southport,
Lancashire, says: 'The returns on with-profits have never recovered
from the stock market slumps of 2000 and 2001. Everyone is sitting on a
legacy of long-term losses that cannot be clawed back.'

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Like Shandley, many financial advisers have all but given up on
with-profits. One recent survey by insurer Skandia found that
independent financial advisers would recommend with-profits for only 11
per cent of clients. Three-quarters of their customers said they were
unhappy with existing with-profits investments.

Patrick Connolly of independent adviser AWD Chase de Vere in Bath,
Somerset, says: 'With-profits is an outdated concept in savings. There
is a dislocation between what happens in the financial markets and the
returns you actually get.' And Joss Harwood, director of adviser Eldon
Financial Planning in Bishop Auckland, County Durham, says: 'The
products frustrate us endlessly. Surrender values can vary daily and it
makes it hard for clients to plan with any certainty.'

Neither firm of advisers has recommended any new with-profits
investments for several years. But what are the options for savers who
still have with-profits plans?

Loyal: Jill Cowles, with husband Paul and Mouse, is happy to keep her with-profits plans

The first rule is not to act in haste. Connolly says: 'Check whether
there are any guarantees attached to your plan, such as annuity rates
on pension policies, bonus rates or returns on maturity.' Such promises
can more than make up for pedestrian investment performance.

Quitting a with-profits fund can be fraught. Savers must first check
that they are not liable to pay a market value reduction (MVR), a
charge that can be levied on those who leave a with-profits investment
early.

Harwood says: 'Where possible, we manage our clients' investments so
that we switch out of with-profits when the bonus values look right and
when there are no penalties.'

The recovery of stock and bond markets last year has led to
reductions in MVRs. Standard Life has cut its MVR on some pensions from
6.8 to 2.9 per cent, for example.

And sometimes an exit penalty is worth paying. Shandley says: 'The
cost of getting out must be weighed against the opportunity cost - that
is the investment chances you miss by not making the move.'

A prudent approach is to treat each investment on its own merits,
which is what retired solicitor Geoffrey Scarth has done in the case of
two long-standing with-profits bonds.

He decided to keep one investment going with Prudential but last
month cashed in the other bond, with Aviva. He reinvested the money in
a portfolio of funds with Skandia.

Geoffrey, 77, enjoys an active retirement with wife Enid, a former
physiotherapist. He plays bowls twice a week and has a busy social life
with friends near the couple's home in Whitley Bay, Tyne and Wear.

Prudent: Geoffrey Scarth treats investments on their merits so he kept a Prudential plan but cashed in an Aviva bond

The Scarths are comfortable in retirement, but Geoffrey is keen to
ensure their investments are working well for them. 'Having an income
from our investments helps to give us a choice about how we spend our
money,' he says.

Geoffrey was advised by David Dodds, planning director at Wade
Financial Services in North Shields, Tyne & Wear. Geoffrey says:
'When I was a solicitor, people paid to take my advice. I'm now happy
to pay to take the advice of a fellow professional. David recommended
switching away from Aviva and so I did.'

Dodds says: 'You cannot take a blanket approach because some
with-profits funds have done better than others. We generally advise
clients in Prudential to hang on to their bonds because it has been
head and shoulders above others in terms of performance and the
proportion it invests in growth assets.'

Dodds recommended waiting to cash in the Aviva bond until the MVR
had been removed. Some bond investors have the opportunity to exit with
no penalties if they switch out of with-profits on the tenth
anniversary of their investment.

Bond sales hit a peak between 2000 and 2002 and with-profits bonds
worth an estimated £40billion could be cashed in under the ten-year
rule.

But some investors are happy to stay loyal to with-profits. Jill
Cowles invested lump sums in two Aviva with-profits bonds nine and
eight years ago. Jill, 50, a local authority learning and development
coordinator, divorced in 2000 and was looking for a secure home for the
proceeds of her settlement.

'There was a period just after the divorce when this money was all I
had and I didn't want to take risks with it,' she says. 'I needed to
invest somewhere that was safe and secure so I wouldn't feel vulnerable
again.'

Jill has since married Paul Cowles, 45, a telecoms engineer, and
they live in Weston-super-Mare, Somerset, along with her son, Adam, 18,
and a Jack Russell called Mouse.

But Jill is happy to leave her cash where it is. 'I have seen the
bonds grow in value by about one-third since I first invested and I'm
satisfied with that,' she says. 'I don't want to take big risks. I
never want to feel financially exposed again.'

The decision to stay or get out will be more complex for endowment
savers who are still paying in monthly and fear they could be throwing
good money after bad.

Standard Life, for example, has 97 per cent of its mortgage
endowments classed as 'red' or 'amber', meaning they are unlikely to
hit their target values. The figure is 96 per cent for Aviva and 95 per
cent for Legal & General.

But the endowments come with life insurance, which may still be
important to protecting a family. Joss Harwood says: 'Think about
whether you need the life cover. If you decide you don't, look at the
surrender value of the policy and add it to the premiums you have left
to pay over the plan's term. If this figure is more than the latest
projected maturity value, it could be time to reassess.'

Bonuses that smooth out a bumpy journey

With-profits money is pooled in a fund and invested in assets including shares, property, gilts, corporate bonds and cash.

The fund can support a wide range of savings products, including pensions, endowments and insurance bonds.

But the value of your with-profits savings is not directly linked to the day-to-day value of the fund. Instead, investors supposedly benefit from any long-term growth of this fund through bonuses. There are two main types of bonuses. Annual bonuses are valuable - once granted, they cannot be taken away provided you hold the plan until maturity.

Terminal bonuses are paid only when a policy matures, reflecting how the fund has performed over the whole life of your investment.

Increasingly, insurers have switched returns from annual bonuses, which require lots of capital to support the promise, to terminal bonuses. With-profits fans say the bonus structure is a great strength, allowing firms to smooth out bumps in markets and in bad years pay more than investors would otherwise get.

David Belsham, chief actuary at Prudential, says: 'Our approach to smoothing and bonus setting has protected policyholders from the full impact of volatile investment conditions.' But bonuses can also be changed for marketing and cost-saving reasons.